Outsourcing Booms in Medical Manufacturing

A walk down the aisle at the recent Medical Design and Manufacturing show in
Philadelphia showed evidence of a budding trend -- outsourced medical device manufacturing.

Ordinarily, we think of outsourced manufacturing in terms of high volume, low mix products such as TVs and laptops. Medical equipment has long been viewed as too complex for outsourcing. That’s changed, and new research from Frost & Sullivan adds data to substantiate the anecdotal evidence.

According to Frost & Sullivan, original equipment manufacturers (OEMs) need to keep up with rapid technical advancements in electronics. That favors outsourcing, since the electronics manufacturing service (EMS) providers are well schooled in electronics. Consequently, OEMs are increasingly turning to EMS providers to better handle the escalating volume of electronic content in the medical devices. Opportunities in high-level product assembly and complete-build projects are going to EMS companies. Given all this, the potential for EMS in the medical industry is expected to double over the next few years.

Frost & Sullivan’s research finds that the market for EMS providers in medical earned more than $16.43 billion in 2012. Frost & Sullivan estimates the EMS' share of medical manufacturing will more than double to $34.38 billion by 2019. Rising demand for engineering support, as well as improving EMS competencies in product introduction, manufacture design, and value-add services will boost EMS growth in the medical industry.

In the past, North American medical and defense industries have chosen not to outsource their manufacturing. For medical, it was presumed that EMS companies have not had the expertise to produce high complex, low volume medical equipment. Frost & Sullivan research suggests things have changed in the EMS industry.

“EMS providers have definitely come a long way in terms of transforming OEM mindset regarding their expertise,” Lavanya Rammohan, research analyst, electronics manufacturing equipment at Frost & Sullivan, and author of the research, told Design News in an email. “Most EMS companies have better manufacturing and in-house resources and domain knowledge for low to mid-volume and high-mix manufacturing in comparison to medical OEMs.” Because of this, medical EMS providers are now increasingly playing the role of a strategic partner as opposed to simply a low-cost contract manufacturer.

Given the stringent regulations in medical manufacturing, not all products can be outsourced. Even with the growing expertise of EMS providers, the risk of liabilities prevents OEMs from outsourcing several services. OEMs are under huge scrutiny, which limits their outsourcing to tactical operations, such as printed circuit board assembly and sub-system assembly.

“This is a factor that is slowing outsourcing to cost-competitive countries,” Rammohan told us. “There are stringent FDA and certifications/approvals that are needed to bring products back into the country. This is a reason why Tier 2 and Tier 3 EMS providers that lack global footprint have done well and not lost opportunities due to lack of global presence.”

Most of the medical outsourced manufacturing is focused in North American and Europe. “In terms of OEM requirements, North America and Europe are on par with the overall outsourcing behavior,” said Rammohan. “One difference is in North America, some outsourcing is being focused in Mexico as opposed to countries in the Asia Pacific.”

The needed expertise tends to reside mostly in North America and Europe. “The dynamics of medical electronics manufacturing do not follow typical outsourcing trends,” said Rammohan. “North America will continue remaining a strong manufacturing hub for high-end, complex, and high reliability medical devices.”

While speed-to-market and medical electronics expertise are strong arguments for sending work to EMS providers, the overriding impetus is financial savings. “Cost is and will continue to remain the key driver for any outsourcing including the medical industry,” said Rammohan. “This will be one of the crucial factors that will encourage EMS penetration into medical industry in the next three to five years.”

Rob, the products made to mil spec vs products made with COTS hardware and software were pretty easily distinguishable until ROHS. After that, things got pretty confusing, especially the terminology. But building a product with COTS components that still use lead solder doesn't make a product mil-spec. Mil-spec was a long, complicated, gnarly process. As to what terms are used now, I don't know. My knowledge--which came from OEMs and board-level suppliers who bought components and sold their boards as sub-systems to OEMs--is now about 5 years old, so I'm not up to date, either.

Yes, Vimalkumarp, that was the original arguement that sent bilions of dollars in manufacturing to China. In many cases, that was a wise idea. Yet I remember at the height of the rush to China, a distribution executive noted that his customers were shifting to China without any thought or investigation as to whether it was the right decision. Their investors expected them to shift to China to save money, so they did so.

@Rob: Yes as you have rightly mentioned cost arbitrage was one of the most important reasons for the shift to China for manufacturing. Now other avenues like Costa Rica, Vietnam,Bangladesh are also in the arena. Quality issues were observed in China and cost is also rising which has forced the device manufacturers to explore options other than China.

your point is excellent that companies are seeking manufacturing closer to their markets as this saves lot of money is logistics. Ireland is an example for this kidn of choice. Almost all medical device giants have their manufacturing setup in Ireland.

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